Spark Capital: Indian Pharmaceuticals - Sector Report - The 'Leader' and the 'Challenger'
Spark Capital Advisors(India) Private Limited
15 Jan 2014
Available for Immediate Download
We initiate coverage on two companies which have been torch-bearers for the Indian pharmaceutical industry for over a decade – Sun Pharmaceutical Industries and Dr Reddy’s Laboratories. Sun, with its specialty focus, operational efficiencies, M&A track record and superior execution, has led the Indian pharma pack in recent years, both in terms of financial performance and stock returns. Dr Reddy’s, with its quality focus, management depth and complex generic and biosimilar capabilities is among the front-runners for challenging Sun’s supremacy. We initiate coverage on both these high-quality names in the Indian pharmaceutical sector with a positive outlook on their performance. In this report, we also analyze the key recent trends in the US generic industry. In recent months, the pricing environment for generic drugs in the US has turned unusually favorable for manufacturers. Decades-old drugs, used for common indications, which were cheap for many years, have witnessed substantial price rises and many generic players are benefiting from this trend. Offsetting these positive surprises are multiple headwinds which include a consolidating channel, shrinking generic pipelines and approvals delays. Key sector thoughts: Given the unusual price rises for several generic drugs in recent months, we explored the topic in detail. Our analysis of data available from US government sources for 3,499 generic drug presentations revealed price rises for 48% of them in the past 12 months. Prices increased by more than 100% for 6% (197) of our sample. The prices of 20 drug presentations increased by more than 10x. In many instances, drugs which are used for common indications and were cheap for many years, have witnessed substantial price rises While the market for each generic drug is unique and has its own dynamics, the reason for most instances of shortages/price rises has been the exit of certain players (for reasons ranging from manufacturing issues to raw material shortages) and delay in new generic approvals. Among Indian players, Sun (through its subsidiaries Taro, URL/Mutual and Caraco) has been the biggest beneficiary of rising generic drug prices The US pharmaceutical supply chain has witnessed a series of megamergers and partnerships in recent months. The recently announced JV between CVS Caremark (no:1 drug retailer) and Cardinal Health (no:2 drug distributor) for purchasing generic drugs is a case in point. While channel consolidation is generally negative for generic manufacturers, players with the global scale, large product baskets and strong channel relationships could benefit by cutting win-win deals with these ‘generic super-buyers’. We also provide an overview of the US generic supply chain in the report Stock calls: We introduce FY16 estimates for our entire coverage universe and roll-forward valuations to FY16E for stocks under coverage. Our updated stock views: APHS (Reduce, TP: Rs. 891), ARBP (Reduce, TP: Rs. 365), BIOS (Add, TP: Rs. 519), CDH (Buy, TP: Rs. 908), DIVI (Buy, TP: Rs. 1452), DRRD (Buy, TP: Rs. 2893), GNP (Add, TP: Rs. 577), IPCA (Buy, TP: Rs. 821), JOL (Reduce, TP: Rs. 122), LPC (Add, TP: Rs. 1010), SUNP (Buy, TP: Rs. 673) and TRP (Reduce, TP: Rs. 491)